You can not blame the private equity funds for bad decisions, but you can blame the managements which sell out to them, according to John Daane, chairman, president and CEO of Altera.
“It’s not the investment people that make the bad decisions, it’s the boards of the companies which make the bad decisions by deciding to sell,” said Daane.
According to Daane: “Managements should be doing something which will benefit the company in five years’ time, not what will increase cash flow next quarter. The management in these deals always say they’re looking at the long-term, but when the financial people make their presentations to the banks, they tell them they expect to get the money out in three years or less.”
“Private equity funds acquire, take on debt, dividend themselves and sell the shares,” said Daane. “In the tech world you need a high R&D spend. I could double the cash flow of Altera by laying off half the staff. If the management think they’re better off selling, then they could do the necessary work themselves.”
The reason they don’t is simple: “In many of these cases the management make a lot of money.”
Daane’s views are similar to those of Wim Roelandts, CEO of Altera’s arch-rival Xilinx. “Private equity funds buy a company, leverage the hell out of it, sell bits and pieces, cut R&D spending and go public to get their money back,” said Roelandts.